Thursday, April 15, 2010

Here’s one more example of why we are known as The Mortgage Experts. When industry experts need some insight, they call us.

American Banker needed some information on why so many loans fall apart at the last minute, costing lenders lots of money, so they gave us a call. Here’s an excerpt from an April 14 article by Kate Berry:

This month, Steve Abreu, the president of GMAC Inc.'s mortgage operations, warned 150 loan officers that wasting the back office's time would cost them.

He told the sales representatives at a Fort Washington, Pa., branch that from now on part of their compensation would be tied to pull-through rates — the percentage of applications that end up being converted to closed loans. GMAC wanted to cut the costs of having processors and underwriters work on loans that don't get funded. So it gave the loan officers an incentive to do better up-front screening.

"The whole reason we did this was just to lower our costs to originate and make sure our loan officers were taking good applications so we would have a better close ratio," Abreu said in an interview. "If they don't hit a certain threshold, they get dinged."

While GMAC's move is unusual, it underscores one of the industry's less-obvious problems today. Tightened underwriting guidelines have increased the risk that a loan will not make it all the way through the pipeline. Aside from the man-hours spent in the back office, lenders stand to waste money on hedging future secondary-market sales of loans that never materialize.

Chris Bennett, the president and chief executive of Vice Capital Markets, a Novi, Mich., hedging and interest rate risk management firm, said loan officers often hold out hope that a loan will be funded "even if they know the deal is dead."

"You could have a loan that is locked for 45 days and it gets extended and the lender ends up hedging the loan for 90 days and it may never be closing," Bennett said. "So lenders end up hedging what amounts to [nothing], and it's expensive."

Despite the turmoil of the past few years, lenders complain that many loan officers have not changed with the times.

"The subprime days lasted for so long and so many people got in the business when all you did was collect a Social Security number and an address and the deal miraculously closed," said Chris Thomas, the owner of Mortgage Support Services, a Westminster, Colo., lender. Today, most real estate deals fall apart at the last minute because loan officers "haven't read the guidelines," Thomas said.Though lenders typically run loan applications through automated underwriting engines, such software may not catch tighter restrictions added by mortgage insurers, such as (lower) total debt-to-income ratios, he said. "The reason loan officers are not up to speed is that they don't know how to process a loan."

Loan officers need to do a better job of collecting data from potential borrowers, so lenders are not spending money out-of-pocket underwriting and processing loans that ultimately fail, several executives said.

"It's a different world," GMAC'sAbreu said. "You really need to gather as much information as possible before you hand off the loan so you have a clearer picture of the credit profile of the borrower."

Walsh agreed. "Some loan officers really didn't learn the business," he said. "The business was always, 'Just take loans, just take loans,' and there was no ramification for high fallout."

Fannie Mae has just announced new waiting periods for people who have sold a house in a short sale and want to buy a new house.

The new waiting period is 2 years if the borrower has a 20% down payment, 4 years if they have a 10% down payment, and 7 years if they only have the minimum down payment allowed for a particular loan program. The minimum is usually 5%.

The new rules take effect in June for loans that are run through Fannie Mae's online underwriting system, and in July for loans that are manually underwritten.

Friday, April 9, 2010

FHA is now officially accepting electronic signatures on real estate sales contracts. Although most lenders have accepted electronic signatures on sales contracts in the past, they really weren't supposed to be doing it. (Imagine that - a lender doing something they weren't supposed to be doing!)

If anyone needs documentation because they are in a fight to the finish with their lender about this, refer to Mortgagee Letter 2010-14.

Wednesday, April 7, 2010

Everyone is allowed to dispute inaccurate information on their credit report. If you send a letter to the three credit bureau (Experian, TransUnion, and Equifax), they are obligated to pursue the matter for you. If the creditor (the company whose information you are disputing) does not reply within 30 days, the information you are disputing gets removed from your credit report. So far, so good.

Here's the problem. Many "credit repair" companies and individuals are disputing legitimate derogatory information, in the hopes that the creditor will not respond and the derogatory information will be removed from the report. Without the derogatory information, the credit scores go up. However, Fannie Mae and Freddie Mac (the companies that buy most loans from lenders after the closing) are on to this scheme. So now, when there is a notation on a credit report that an account has been disputed, Fannie and Freddie are often exercising the option of downgrading the loan application and are imposing lower debt-to-income (DTI) ratios on the borrower. Instead of being able to borrow 45% of your gross income to pay for your house and other debts, you will be limited to a maximum DTI of 38%. That is a huge difference and will prevent many people from qualifying for a mortgage.

So what should you do?

Don't listen to anyone who tells you they will "repair" your credit. They will most likely dispute every derogatory account on your report (even the legitimate ones) and your DTI ratio will be lowered by Fannie and Freddie. They will also charge you lots of money for doing something that you can do by yourself, but that is an entirely different issue.

The most important thing to do is use a lender who stays current on the changes in the lending industry. Most lenders do not. The best way to tell if they know what they're doing is to ask them how to find the Fannie Mae underwriting guidelines. If they aren't able to tell you, they are obviously not reading them. Here's the link to the guidelines - use it to test your lender - it's great fun!

If you have an error on your credit report, don't dispute it until after you close on your loan. Many times, the error will not affect your ability to qualify for the loan. If it does need to be corrected before qualifying for the loan, any competent lender will be able to do it for you without having it show up on the report as being a disputed account. If they don't know how to do that, find another lender who does know how to do it.

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